Canadian Energy Pipeline Association Open Letter

Royalty Hike Will Kill Pipeline

David Macinnis, Financial Post

Published: Friday, October 12, 2007

Future generations of Albertans will look back at this era as a time of transition. The question is, will the decisions made today provide for a much-sought-after balance between the costs and benefits of economic growth, or will they cause a slowdown in the Alberta economy that sees us failing to generate the returns that our abundant resources -- both natural and human -- can provide?

The debate was fuelled by the Sept. 18 release of a report from the panel struck by the Government of Alberta to review royalties paid by oil and natural gas producers. On one side are the industry, pension fund managers and others who are concerned about the potential for the flight of investment capital from Alberta, especially if the report is implemented in its entirety. On the other are Albertans focused on the negative impacts of fast-paced growth on our communities and the complete absence of a government plan to manage those growth pressures. The conversation engaging Albertans has actually been going on for several years, and it is far more strategic in nature than the one industry and the financial community are taking part in. It's time the rest of us joined in.

Most Albertans are leveraging the royalty report to demand answers to questions about what was done with successive years of government surpluses. Why is our community infrastructure so lacking and, most importantly, just what are governments and regulators doing to protect and promote our interests? The government needs to signal to Albertans that it will soon develop a strategic plan that will address these questions.To do so, the government will have to move away from its tendency to hold one-off reviews and consultations on royalty rates, land-use planning, climate change and other matters. Instead, it will have to acknowledge that these issues, and more, are connected and that they must be dealt with in a far more comprehensive manner than has historically been the case.

The members of the Canadian Energy Pipeline Association (CEPA) are committed to playing their part, as we have a significant stake in the outcome. Our member companies transport 97% of the oil and natural gas produced in Canada, and have spent hundreds of millions of dollars developing pipeline plans based upon anticipated oil and gas production growth out of Alberta. If changes to royalty rates cause producers to reduce their expansion plans, employees of pipeline companies, like those of so many other sectors that depend on the

growth of the oil and gas exploration and production sector, will be affected.

In addition to being motivated by a concern for the economic well-being of our families, we also believe that Alberta must effectively balance both the upside and downside of growth. With this year's budget, the current administration has begun the reinvestment process: $4.3-billion for municipalities, $1.3-billion for schools, $3-billion for health facilities and equipment, $4.6-billion for provincial highways and $1.6-billion for post-secondary facilities. And more must be done. The government will need a strategic, long-term plan in place and maintain or grow its revenue stream to deliver on that plan. Therein lays the rub.

Increasing tax take via a royalty increase will not produce the royalty panel's simple promise of a $2-billion increase in revenue. In fact, Alberta's revenue stream will decrease. EnCana and Talisman alone, as stewards of their shareholders' money, would need to move $1.5-billion worth of investments to other jurisdictions. Canadian Natural Resources Ltd.'s project cancellations would eliminate the need for one of the five multi-billion-dollar oil pipelines proposed to handle increased oilsands production. That pipeline would have created more than 12,000 person-years of work, added $1-billion to Canada's GDP and increased personal, corporate and property taxes paid to governments. So much for reduced wait times in emergency rooms and more funds for teachers and schools!

The alternative? CEPA believes that the Government of Alberta must develop an energy policy framework through three concrete initiatives that will address the questions being posed by Albertans. It must engage Albertans in their communities and provide them with a clear understanding of how the system works -- specifically, how government and regulators protect and promote the interests of Albertans. It must develop a strategic plan that clearly illuminates our collective path forward for the next two decades. It must monitor and report on the performance of departments and agencies in delivering efficient and effective fiscal, regulatory and environmental regimes, in order to prove that the system is increasing benefits and minimizing costs for Albertans.

Doing so will ensure that more than $20-billion of pipeline projects will be built, thus serving as the backbone that will enable Alberta to maximize the return from our abundant resources --both natural and human.


-David MacInnis is president of the Canadian Energy Pipeline Association (CEPA).